Crowdfunding and Social Networks

Last week we were invited in Brussels to give a presentation at a major event organised by the European Commission, DG Internal Market and Services to explore issues, potential and risks related to crowdfunding. The event, Crowdfunding – Untapping its potential, reducing the risks – was the first coordinated by the EC and saw the participation of many important players and experts in the field. Our presentation was focused on the role of social media in crowdfunding and the interrelation between the two. Below the major points touched during the presentation.

The crowdfunding evolution has been developing in parallel with the social media revolution

We’ve approached crowdfunding as a product of social media, and we’ve always been looking at it mainly from that perspective. Social Media reduce some geographical and mental barriers allowing for the rise of crowdfunding, and then served as a tool to facilitate it. The idea of ??collecting funds from various donors or investors is certainly not new, but crowdfunding goes far beyond this, and it does so by adding the power of social networks to collective funding.

Of course, the viral reach of social media has a great impact, but it’s not only about that. Crowdfunding is also about community, engagement, participation, empathy, all enabled and fostered by web 2.0 technologies.

A new mindset and the sense of empowerment

Crowdfunding is a phenomenon which emerged from and is facilitated by the new behaviours and the mindset that come out from the constant and almost invisible interactions happening online everyday. These interactions are allowing for a continuous conversation with our “peers” at a global level, thus helping on one side to increase our knowledge of society as a whole, on the other side to grow a sense of identification with the crowd, and to get that validation from the masses that empowers us to do something that we would have never thought ourselves to be able of. Everybody can be an inventor or an investor today. Whereas social media lowered the barriers to access (and production) of information, crowdfunding lowered the barriers to access (and sharing) of capital, fostering a democratisation of innovation and philanthropy.

New expectations of return

This mentality explains also the emergence of a new type of transactions on a web 2.0 environment, transactions that are not always activated in order to buy something. In many cases the expectations of return have changed. Already with the emergence of crowdsourcing we have seen the birth of economic models based on reputation and recognition rather than on money. With crowdfunding the same can be true: the rewards are often non-monetary and, in most cases, they represents a collective return rather than an individual one.

Social Proof, the value of relationship capital and the viral power of social media

In crowdfunding, relationships are important, all the social ties, weak or strong, that we have online and offline. We refer to them as social and relationship capital, the first being measured in quantity (so how many friends, fans, followers we have), the second in quality (actual interactions, conversations and reciprocal trust). Again, social media plays a great role here, lowering geographical boundaries and allowing for more of those ties to emerge. Now the social networks of entrepreneurs can be much wider, and this is fundamental to crowdfunding. Social ties provide a signal to the public that the project is worthy, it’s the so called social proof: we all tend to look to the actions of others to guide and validate our actions. When we fund a project, we are more ready to vouch for it and to engage some of our most immediate networks. And so do our contacts. And social media gives an unlimited potential to the expansion of the networks.

Social Media provide the right tools to go beyond our most immediate circle of contacts and get to a broader group of strangers. The strength of weak ties, or social capital, can have a value, especially in the aggregate. But the role of strong ties or relationship capital is often bigger: they are the first helpers, building trust and providing proof of legitimacy to a project, they validate it for late-supporters. The networks, and crowdfunding, expand to the rhythm of community advocacy.

Trust, transparency and crowd validation

The vicinity, the sense of identification and confidence brought in by the continuous interactions on social media also allowed for the rise of a new value: trust. Trust is established because we know each other better, we interact with each other every day, and because all the social media infrastructure allows for a transparency that has never been experienced before. Trust tags are vital to crowdfunding because trust is also what can transform a social tie in an economic tie. Trust, enabled by transparency, in turn facilitated by all the social media infrastructure, is a new currency in economic transactions.

Trust is also what allows to a large extent this environment to regulate itself. Crowdfunding, occurring in a web environment, generates an obvious worry: the possibility for fraud. But let’s not forget that crowdfunding is facilitated by social tools: the public, transparent nature of it should help identify and stop bad behaviours. Probably, transparency could have a great impact in weeding out fraud, and the use of social and public components in a crowdfunding campaign can provide a high level of protection in what is essentially a self-regulating and self-monitoring environment.